Making the Segue From Stability to Growth (10/5)

Making the Segue From Stability to Growth

Both planning for and managing growth are studies in assessment and allocation of resources, and they begin and end with the thoughtful examination of your company's identity, its goals and its marketplace.

Any discussion about business expansion and managing growth makes an assumption that should be placed squarely on the table, right from the get-go: Planning is essential. Both planning for and managing growth are studies in assessment and allocation of resources, and they begin and end with the thoughtful examination of your company's identity, its goals and its marketplace.

Case in point: Segue Software, Inc. Named because of its expertise in helping companies test conversions from one platform to another, the revitalized Segue has made a segue of its own, from a floundering organization to a redefined outfit focused on growth.

Michael Maggio, senior vice president of marketing and alliances with Segue Software, is the only senior manager to have made the transition last year from old regime to new, and having experienced a shift from the static to the dynamic. The main distinction, as he sees it, is the new group's focus on planning.

In 1997, to spur lackluster performance and initiate growth, Segue brought in a new senior management team headed by CEO Stephen B. Butler, a 20-year veteran of the high-technology software business, and set about redefining its vision, recasting its objectives, redirecting product development, and outlining strategy.

"There was more planning than I'd ever seen in this company before," Maggio says, and by the time its bread-and-butter product suite, LiveQuality™, was launched last April, "we were all on the same page."

Consensus Is Critical

When a company is planning for growth, as Segue was, building consensus is critical; it's that shared philosophy that will form the foundation of the plan and fuel its implementation. In Segue's case, once the management team was formed, the vision was articulated, and from that point on, anyone joining the reinvigorated company knew its goals and direction and could get on board, Maggio says.

More specifically, and not insignificantly, the revived Segue is better at executing its plans, added Chuck Conley, vice president of corporate marketing. He's been with Segue for just over three years and deems the new senior management team's fierce focus on realizing its goals an invaluable element. The results are already evident: Maggio and Conley say the company's revenues have doubled since a year ago, with 1997 revenues standing at $21.8 million.

Segue, headquartered in Lexington, Mass., maintains offices throughout the United States, Canada and Europe. The company is a leading provider of electronic business (e-business) testing solutions to an impressive clientele of high-volume transaction and service-oriented organizations such as Fidelity, Reuters Information and Disney Online: That's its new face, the outcome of all that planning last year and the heart of the company's redefined direction. It's an outgrowth of a company founded in 1991 whose main business was the development of testing tools for client/server environments.

During its first five years, the company experienced steady growth and in March 1996, went public. An initial splash saw its stock price spike from $16 to $40/share, however, when first quarter sales didn't meet Wall Street's ambitious projections, the price dropped to the $10-$12 range, with no signs of improvement. Under the gun, Segue had two choices, Maggio says: Shore up the business well enough to be sold or nail down a strategy that would put the company back on a growth track. The latter option was taken, Butler was hired, and a strategy to focus on e-commerce was solidified.

The latter option could be taken with relative comfort because Segue perceived that "e-commerce was just in its infancy," Maggio says, and the company didn't see any potential competitors diving into the software testing market. So Segue decided to draw on what it knew - applications testing - and try to become the leading provider of testing solutions in the emerging arena of e-business. Further, it would seek to distinguish itself by developing products and services that simulate real-life scenarios, customized to the client's needs. It developed LiveQuality, a three-product suite that creates and executes scenarios enabling clients to anticipate and avert potential e-business problems. The application allows a retailer, for example, to learn how to manage sudden high volume on its Web site, while a financial-services firm could program and plan accordingly for unexpected stock market changes.

The e-commerce industry is only 2-years-old, and according to the U.S. Department of Commerce, is expected to grow into a $300 billion industry by 2002. Given that estimate and other experts' projections, Segue believes that e-commerce will become a mainstay of the global economy and feels confident about holding to its new strategy, Maggio says.

In Pursuit of Growth

In addition to redirecting product development efforts, as Segue did, your business can seek growth in a number of ways. It can pursue volume expansion by producing more of the same product or service, or it can expand geographically, seek vertical integration, or diversify its product line.

Once the determination to assume a growth strategy has been made, your management team has to weigh a few conflicting forces to refine the company's direction. For example, will the growth be directed toward short-term profits or long-term gains? Should the emphasis be on profit margins or asserting a competitive position? Should we increase penetration in existing markets or develop new ones? These can be tough decisions, and in order to pursue growth without too much drag on the hull, your management team will have to be in concert.

With the growth vision in place, planning for growth is one direction the standard planning procedure can take. In this case, a CEO has decided to push the envelope by maximizing output rather than seeking stability. Setting objectives is the place to start, and that should be augmented by forecasting, developing strategy, drafting the supporting budgets, and instituting policies to guide the plan's execution.

When drafting your objectives, there are four key concepts to keep in mind: profitability, competitiveness, efficiency and flexibility. Profitability is always one of the chief concerns - if not the main concern - but when planning for growth, you may be likely to allocate more resources such as personnel, raw materials and capital to operations including research and development, sales and marketing in order to develop the business. Consequently, profit margins may be tighter than if you were pursuing a strategy bent on stability because your return on investment would take a hit in the short run.

In terms of competitiveness, successful growth isn't measured so much by speed out of the gate as endurance. You need to examine your company's resources and ensure that they are allocated wisely throughout the period covered by the plan, in accordance with known and unknown variables and in anticipation of your industry's seasons, business cycles and market trends. Despite the media buzz, conventional wisdom still shows the tortoise beating the hare, time and again.

Whenever possible during a growth phase, you should devise methods to measure your company's efficiencies. Analysis of the production process, the ratio of sales leads to deals closed, human resources turnover, and so forth, will help you determine strengths and weaknesses. And improvements in these efficiencies will, of course, affect growth potential.

Similarly, remaining flexible will allow your company to act on and react to changes in the market, as well as to assess internal issues. So should a company retrench, narrow its focus, and develop a family of products from one nucleus that shows promise - as Segue Software did - or would the better strategy be to diversify the product line to the point where its fate wouldn't rest on a single client or market? These are the main considerations, and the related strategic decisions can be made by relying on methods ranging from instinct to marketing surveys to sophisticated statistical analysis.

An Alternate Approach

Following a hunch might seem foolish to some, but most successful entrepreneurs note an implicit confidence in their gut feeling when making decisions. It panned out for Bar/None Records, a Hoboken, N.J.-based independent record label whose industry is particularly volatile and dominated by mega-media companies.

"You live from hit to hit, so to speak," says partner Glenn Morrow, and songs become hits because someone at a record label who feels they have potential bankrolls the recording.

The Bar/None label was founded by Tom Prendergast in 1986, and its second release was a debut by the band They Might Be Giants. Prendergast sensed the release would find its audience and, in fact, it went on to sell more than 100,000 copies - astronomical by indie-record standards.

The growth planning concern for a company like Bar/None in an unstable environment like the music industry is to avoid the temptation to overstaff to meet demand during those unpredictable peak periods. Morrow says that excess staff causes a company to ratchet the whole operation to a level where it's filling the pipeline with lots of records that aren't worth promoting, just because the company had had a temporary need for sturdier operations and promotion.

In September, Morrow was completing Bar/None's annual business plan, and with more than 10 years under his belt, he's learned to forecast conservatively. Usually, he says, the company's actual revenues reflect his projections. With a history of cultivating several top-shelf acts that have moved on to major labels - Freedy Johnston and Luka Bloom among them - and retaining others, like Juliana Hatfield, Esquivel and Poi Dog Pondering, who enjoy the creative freedom Bar/None affords them - the company knows what it does well. And it continues to work its niche as a house where the quality of the songwriting prevails regardless of musical genre, and one whose current business plan largely rests on the promise of four or five up-and-coming artists.

Forecasting for growth in companies like Bar/None is a challenging task that's laden with responsibilities. It involves projecting the sales revenue for the planning period, which will determine the scope of all other activities required to achieve those projections. At the same time, resources must be forecast in order to ensure that the products or services make it to the selling stage. Both types of forecasts can be undertaken based on an entrepreneur's sense of the market and its wants, market surveys of customer preferences and buying patterns, time-series analyses, which examine the past relationship between sales and time to determine patterns on which to base a forecast, and econometric models, which take into account the factors affecting sales and production including price, competing products, complementary products, availability of credit, consumer tastes, and so forth. Resource forecasting is a slightly better bet than sales forecasting, since the entrepreneur is estimating the quantity of raw materials needed to produce the product, rather than conjecturing how the target markets will respond to the product once it's available.

With objectives determined and forecasting underway, business owners can develop strategies and tactics for achieving those objectives. For example, Segue Software set an objective of vertical integration of its LiveQuality product suite. The strategy that set the ball in motion was the establishment of partnerships with industry-leading consultants including Coopers & Lybrand LLP, IBM Global Services and Interim Technology, which in addition to supplementing Segue's consulting services by creating detailed plans for day-to-day e-commerce business processes being tested, are trained and certified by Segue engineers. As these world-class consultants build their businesses, they introduce the Segue testing process to new markets. Consequently, through these partnerships Segue is "priming the pump," Maggio says.

The strategy encompasses the "how" of the plan. If you want to expand geographically, for example, you might seek to merge with or acquire a partner in a neighboring region - thus your strategy would outline mergers and acquisitions as a method. Or you might lease space and open new storefronts, which would likewise be articulated as a strategy. Strategies tend to be organization-wide in scope and longer-term in impact, while tactics are the more immediate steps taken by particular divisions to pursue the plan's objectives.

In order to make the entire growth effort add up, budgets must be developed. The sales budget, based on the sales forecast, is of prime importance, and the production, marketing and administrative budgets fall in line based on those figures. Methods can become rather sophisticated, but in short, you can prepare variable budgets, which allow for the possibility that actual output will differ from forecasted figures, or moving budgets, which are modified periodically - usually monthly - so that the appropriate changes can be made and managers can react accordingly, while learning as the business takes shape.

Finally, policies have to be put in place to support the growth plan's objectives. Plans for expansion will invariably involve changing how your company does business with vendors as well as with customers. The policies should be clearly articulated, consistent with the company's vision, and coordinated among the departments that will be called on to interact concerning them. For instance, growth through product diversification might mean the company is operating in a new channel of distribution. If this is the case, ensure that sales and credit terms extended in this channel are in compliance with Federal Trade Commission regulations concerning fair trade practices. A policy should be drafted and reviewed by legal counsel, as well as sales, marketing and operations managers, whose departments will be affected.

Other Considerations

Most would agree that managing growth is a nice problem to have, although it's not without its challenges, namely remaining alert to how well your resources are meeting market demand. Chuck Conley of Segue says that they've kept a careful eye on hiring to ensure the company is staffed with the best people. Unemployment in high technology is negligible, which means that if a company has imminent staffing needs and spots a good candidate, it shouldn't hesitate to hire "because that person will be gone before you know it," Conley says.

Similarly, you should be constantly aware of the business environment and market concerns. Federal legislation that regulates e-business or imposes taxes or other restrictions could have a severe effect on the operations of a company like Segue, so agility is an asset. Other environmental factors can dent a company's fenders. Advanced technologies often require heavy investments in capital and training, which can throw a growing company off balance. And market concerns have to remain at the top of your mind. Where e-commerce is discussed, so are security issues, and while encryption software is becoming more sophisticated, hackers continue to break codes, as the recent sabotage of The New York Times' Web site illustrates. It's the kind of news that puts e-commerce customers on edge.

These examples point to the importance of staying awake at the wheel, constantly evaluating resources and systems and trying to anticipate the market's next step - or at least being ready to react when the foot falls.

If the growth planning process seems a little overwhelming, consider attacking it in stages; consider taking a break and putting on Bar/None artist Esquivel's "Space Age Bachelor Pad Music" while contemplating your direction. The music just may help you catch a new orbit and head back to the drawing board, or the laptop, refreshed and ready to plan.